Arbitration In IndiaCommercial Agreements & Contracts In IndiaSupreme Court DecisionsThe Dichotomy of Seat and Venue of Arbitration Continues

SUPREME COURT OF INDIA

Mankastu Impex Pvt. Ltd. v. Airvisual Ltd.

 ARB. PETITION 32/2018 | DATE: 05.03.2020

FACTS

The Petitioner and the Respondent had entered into a MoU whereby the Petitioner was an exclusive distributor of the Respondents Air quality monitors products for a period of 5 years. The former is a company incorporated in India whereas latter is incorporated in Hong Kong.

Thereafter, the Respondent was acquired by IQAir AG (“Respondent No.2”). The Petitioner was intimidated by Respondent No. 2 that as a consequence to the acquisition, the product was discontinued and that it was not bound by any contractual or legal obligations of the Respondent.

The Petitioner invoked the MoU. It brought to the knowledge of the Respondent No. 2 that MoU explicitly specified that incase of situation like an acquisition, the Respondent was obligated to ensure that the acquiring party shall uphold the same contractual obligation and that the acquisition was done only after considering the pre-existing obligations.

The Respondent rejected to consider the Petitioners averments, hence the Petitioner then resorted to invoke the Clause 17 i.e. the arbitration clause of the MoU.

“Clause 17 – Governing law and Dispute Resolution

17.1 This MoU is governed by the laws of India, without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction.

17.2 Any dispute… shall be referred to and finally resolved by arbitration administered in Hong Kong.

The place of arbitration shall be Hong Kong.

…

17.3 It is agreed that a party may seek provisional, injunctive, or equitable remedies, including but not limited to preliminary injunctive relief, from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding.”

The Petitioner further filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“the Act”) for order –

1. directing the Respondent No. 1 and 2 to execute the MoU;
2. permitting the Petitioner to act as the exclusive distributor over the products; and
3. refraining Respondent No. 1 and 2 from terminating the MoU and also from contracting third parties for the subject matter. The Court injuncted the Respondent from selling the products in India.

The Respondent No. 2 countered the arbitration notice by asserting that firstly, the MoU was not enforceable against them and secondly, according to Clause 17, the dispute can only be resolved by an arbitration institution in Hong Kong.

Hence this Petition was filed under Section 11(6) of the Act read with Arbitration and Conciliation (Amendment) Act, 2015 read with the Appointment of Arbitrator by the Chief Justice of India Scheme, 1996 seeking appointment of a sole arbitrator under Clause 17 of MoU.

ISSUE BEFORE THE SUPREME COURT 

The following issue was considered by the Supreme Court:

Whether the parties have agreed that the seat of arbitration is at Hong Kong and whether this Court lacks jurisdiction to entertain the petition filed under Section 11 of the Act?

OBSERVATION 

The case of the Petitioner was that since the Respondent is a body incorporated outside India, in accordance to Section 2(1)(f) of the Act, the arbitration would be an international commercial arbitration having a seat in Delhi and thus, the petition filed under Section is maintainable. Further, the Clause 17.1 was emphasized to contend that the Delhi High Court had the jurisdiction whereas Hongkong was merely the venue to conduct the arbitration.

To support this, the Petitioner relied on the judgement of Union of India vs. Hardy Exploration and Production (India) INC, (2018) 7 SCC 374 wherein the decision advances twofold condition for a venue to be deemed as seat

“(i) no other condition is postulated;

(ii) if a condition precedent is attached to the term ‘place’”.

The Petitioner submitted that these conditions are not fulfilled herein, so the venue cannot become the seat.

Furthermore, the Petitioner’s averment was that Clause 17.1 specifically mentions the proper law of the contract to the laws of India. The MoU is completely silent on proper law and curial law of the arbitration and therefore, in the absence of clear stipulation, pursuant to Clause 17.1 the laws of India would be the proper law and curial law of the arbitration.

On the contrary, the Respondent countered by submitting that since the place of arbitration is outside India, Section 11 will not be applicable. The Respondent relied on the recent ruling of the Apex Court in the case of BGS SGS Soma JV vs. NHPC, 2019 (17) SCALE 369 to submit that the term “arbitration proceedings” clarifies that the venue is the seat of arbitration and the term “administered” further clearly establishes that the parties have agreed for the seat of arbitration to be Hong Kong. This case has also held the case of Hardy exploration to be a bad law.

The Court affirmed that the arbitration is an international commercial arbitration. The Court referred to the BALCO decision wherein it was held that Part I of the Act will not be applicable to International Commercial Arbitration held outside the India.

Thereafter, the Court referred the case of Enercon (India) Limited and others v. Enercon GMBH and another (2014) 5 SCC 1, and further elucidated that the seat of arbitration is a fundamental aspect of arbitration proceedings as:

“it determines the applicable law when deciding the arbitration proceedings and arbitration procedure as well as judicial review over the arbitration award…it is about which court would have the supervisory power over the arbitration proceedings”.

The Court referred to the Clause 17 and observed that the plain reading of the Clause suggests that the Hong Kong was not only agreed to be the venue of arbitration proceedings but also for complete administration of the arbitration. Hence, the parties have expressly agreed for Hong Kong to be the seat of arbitration. Agreement to be administered by Hong Kong implies that the laws of Hong Kong would govern the arbitration proceedings as well as have power of judicial review over the arbitration award.

The Court quoted the decision of Eitzen Bulk A/S v. Ashapura Minechem Ltd. and another (2016) 11 SCC 508, wherein it was held that the juridical seat of arbitration attracts the law of the country and thus, it is not necessary to stipulate the law applicable to the proceedings as law of  such country would be applicable ipso jure.

CONCLUSION 

The Court reiterated the well settled principle that the terms seat and venue of arbitration cannot be used interchangeably. The place of arbitration cannot be deemed to be the basis to infer that the parties had intended that place to be the seat.  The Seat of arbitration is determined from the agreement or the conduct of the parties.

The Court refrained from explicitly addressing the conflict between Hardy Exploration and BGS SGS but instead inferred that the doctrine of binding precedent is not applicable to coordinate bench decisions. Thus, the observation in the judgement of BGS SGS, holding that the law laid down by Hardy Exploration is bad law, does not amount to the latter judgement being overruled.

Further, the Court held that the Indian Courts do not have the supervisory jurisdiction over the award or to pass interim order for an arbitration having seat outside India. Section 11 is not covered under the proviso to Section 2 (2) that makes certain provisions of Part I of the Act applicable to international commercial arbitrations outside India. Therefore, Section 11 application is not maintainable.

The Court held that:

“The words in Clause 17.1 “without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction” do not take away or dilute the intention of the parties in Clause 17.2 that the arbitration be administered in Hong Kong.”

AMLEGALS REMARKS

The Court affirmed the judgment of BALCO read with the judgment of Hardy Exploration to hold that categorical agreement of venue of arbitration does not imply the venue to be the seat of arbitration and deferred from the judgment of BGS SGS. The Supreme Court in the latter judgment had attempted to establish the principle that designation of venue along with the applicable rules of that country will amount to seat.

However, considering that all the three judgments discussed hereinabove are three-judge benches or smaller, they are coordinate benches and cannot be held to conclusively decide the dichotomy of seat and venue. The apparent conflict needs to be resolved by at least a five-judge bench of the Supreme Court, so that the issue is settled once and for all.

Nonetheless, the Court has pertinently observed the significance of seat for assessment of the intent of the parties which it gathered from the contract itself. While determining the seat is essential to interpret the agreement and the conduct of the parties.

However, in order to not indulge in this persisting conflict, it is best that parties opt for a simple and certain arbitration clause, by distinctly identifying the seat and venue of arbitration while using the respective terms explicitly.

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